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Do we still need auditors?

Robert Barrington. Executive Director of Transparency International UK, was invited as a non-accountant to make provocative remarks to a group of auditors on the nature of fairness and audit. The location was the Audit Quality Forum, in the Mansion House on November 28th 2017. A video of the full debate is available here.

As an anti-corruption specialist, I love audits and auditors. We should be on the same side. Audits should be an excellent tool for deterring, and if necessary detecting, corruption. But I am often asked: how is it that auditors could sign off the accounts of FIFA, the Gupta family businesses, Rolls Royce or BHS, to name but a few recent scandals. Were the auditors complicit by deliberately turning a blind eye, acting negligently by doing a poor audit, or just doing what auditors usually claim they should be doing: checking the numbers add up?

Of course, I have no idea which is the truth: but the truth I do know is that none of these shows auditors in a very good light. Ultimately, the reason I might employ a respected accountant, and certainly why I might employ one of the Big Four, is that I am not just buying their expertise in checking the numbers: I am also buying a bit of their reputation. How long will that last, as the list of scandals grows?

It seems to me that audit could go down one of two routes. Route one is adding up the numbers. This might even be done by increasingly sophisticated bots, AI applications which enable an automated assessment of the numbers. They will be accurate, but it will be apparent to an audience of auditors that automated audits may also be less meaningful. The point here is that setting your Terms of Reference as adding up the numbers assumes that a fair audit is one in which the key task is to tell you whether the P&L and balance sheet are accurate based on the financial information to which the auditors have access. Bots could do that.

Route two, the alternative route, is that audits also offer some kind of assurance or reassurance. They start to do what many people mistakenly think they are already doing – offering an assessment of a company’s health.

What is a fair assessment of a company’s health? That might mean looking at areas like diversity, ethics in the supply chain, and whether it is paying the right amount of tax. The kind of thing that society thinks of when granting companies a licence to operate. You might say that it is not for auditors to police these things. But by and large, these notions are already in the public policy statements of large companies. The auditors would be verifying not policing. If a company does not have such statements, there is no obligation for an auditor to lend its reputation to that company: and the numbers could be checked by the bots.

Of course, the elephant in the room is the massive, in-built and highly remunerative conflict of interest that means auditors can be paid many millions of pounds by the very companies they are meant to verifying, and topping it up by offering tax advice and other services. Those conflicts of interest would not look quite so bad if audits had not been signed off at FIFA, the Guptas, Rolls-Royce, BHS, etc. But right now, it looks like auditors simply do not have the will or capacity to self-regulate those conflicts of interest.

Improving this situation, and making audits more sophisticated and more meaningful, might require a change in regulation or legislation. Conveniently, the accounting trade bodies and the Big Four have shown themselves to be formidable lobbyists. Just look at what the Paradise Papers have shown us about how tax regulation was rigged in the Isle of Man; or what came out recently about the secondments of dozens of Big Four tax specialists to the Treasury – who then return to their firms helping clients exploit the loopholes they have built in to the nation’s tax system

Not very fair. And if anyone in this room does think it is fair, you are badly out of touch with reality. I’m certainly not here to knock auditors, but to propose a future in which we praise auditors not bury them. Take a restricted view of audit, and you end up with FIFA, the Guptas, Rolls-Royce and BHS. You end up with gross abuses of the tax system which are clearly not fair for society, but fit within the letter of the law. You end up with corruption going undetected and unchecked until it is too late.

On the other hand, take a view of audit that assumes you are trying to assess a company’s overall health, and you see instantly why the human dimension of audits remain important. And why audits could be seen as a system that operates on behalf of investors, and lenders, and stakeholders more widely.

I look at your industry from the outside, and I see an industry that is more or less in crisis. A tech revolution for which it has no response; a reputation heavily tarnished by corporate failures and tawdry tax practices; an industry creaking under the weight of its conflict of interest; and most seriously, a heavy air of denial.

But I also see a group of honest, well-trained individuals who are technical experts and are natural allies for groups like Transparency International in the fight against social ills like corruption. So I also see a solution: a re-thinking of audit so it is fit for purpose for the 21st century. I hope you choose the path of fairness.

Note: I was asked to make provocative remarks, and my comments should be taken in that spirit. However, there is a serious point at their heart, and they generated much debate both in the session and by email afterwards. Two recurrent points were a) IT/AI advances will indeed render auditors redundant unless they can offer a ‘human’ dimension; b) the inherent conflicts of interest in fee-based audits are so great that a radical solution is needed – an example given was the European Commission’s proposal some years ago, that all companies would contribute to an independently managed pot of cash; audits would then be allocated to firms by independent judges for a fixed number of years from that independent pot of cash.